Question

Europa Publications, Inc. specializes in reference books that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Sales revenue	$	1,500,000
Manufacturing costs:
Fixed		400,000
Variable		715,000
Selling costs:
Fixed		30,000
Variable		60,000
Administrative costs:
Fixed		70,000
Variable		25,000

Required:

1-a. Prepare a traditional income statement for the company.

1-b. Prepare a contribution income statement for the company.

2. What is the firm’s operating leverage for the sales volume generated during the prior year?

3. Suppose sales revenue increases by 12 percent. What will be the percentage increase in net income?

4. Which income statement would an operating manager use to answer requirement (3)?

Req. 1-a.

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX $0 Operating expenses: 0 $0

Req. 1-b.

	EUROPA PUBLICATIONS, INC. Income Statement For the Year Ended December 31, 20XX Variable expenses: 0 $0 Fixed expenses: 0 $0

Req. 2

What is the firm’s operating leverage for the sales volume generated during the prior year? (Round your answer to 2 decimal places.)

	Operating leverage

Req. 3

Suppose sales revenue increases by 12 percent. What will be the percentage increase in net income? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

	Percentage increase in net income %

Req. 4

Which income statement would an operating manager use to answer requirement (3)?

	Contribution income statement Traditional income statement

Answer 1

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Ans to 1-a	Traditional Income statement			Workings	Cost of good sold
	Particulars	Amount ($)			Manufacturing costs
	Sales revenue	1,500,000.00			Fixed Cost	400,000.00
Less:	Cost of good sold	1,115,000.00			Variable Cost	715,000.00
	Gross Profit	385,000.00			Total	1,115,000.00
Less:	Selling and administrative expense	185,000.00
	Net Profit	200,000.00			Selling and administrative expense
					Selling Costs
Ans to 1-b	Contribution Income statement				Fixed Cost	30,000.00
	Particulars	Amount ($)			Variable Cost	60,000.00
	Sales revenue	1,500,000.00			Administrative expense
Less:	Variable Cost				Fixed Cost	70,000.00
	Manufacturing costs	715,000.00			Variable Cost	25,000.00
	Selling Costs	60,000.00			Total	185,000.00
	Administrative expense	25,000.00
	Contribution	700,000.00
Less:	Fixed Cost
	Manufacturing costs	400,000.00
	Selling Costs	30,000.00
	Administrative expense	70,000.00
	Net Income	200,000.00
Ans to 2	Operating Leverage=	Contribution/Net Income
	Contribution	700,000.00
	Net Income	200,000.00
	Operating Leverage	3.50
	So Operating Leverage is 3.5 times
Ans to 3	If sales revenue will increase by 12% all variable expense will increase by 12% also. So new Contribution Income statement:
	Particulars	Amount ($)
	Sales revenue	1,680,000.00
Less:	Variable Cost
	Manufacturing costs	800,800.00
	Selling Costs	67,200.00
	Administrative expense	28,000.00
	Contribution	784,000.00
Less:	Fixed Cost
	Manufacturing costs	400,000.00
	Selling Costs	30,000.00
	Administrative expense	70,000.00
	Revised Net Income	284,000.00	A
	Old Net Income	200,000.00	B
	Increase in Net Income	84,000.00	C=A-B
	Increase in Net Income %	42.00%	D=C/B
Ans to 4	We can see from Ans 3 that the operating manager will use contribution income statement.